OREANDA-NEWS. August 17, 2015. Fitch Ratings has assigned an 'AA+' rating to the Kansas Department of Transportation's (KDOT) issuance of \\$185.785 million highway revenue refunding bonds, series 2015A.

The bonds are expected to sell via negotiation on Aug. 19, 2015.

In addition, Fitch affirms the following ratings:

--\\$1.67 billion outstanding KDOT highway revenue bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY
The bonds are special obligations of the state of Kansas secured by a gross lien on and payable from revenues received in the State Highway Fund (SHF) and transferred to the Highway bond Debt Service Fund.

KEY RATING DRIVERS
DIVERSE REVENUE STREAM SUPPORTS BONDS: Bonds are secured by a gross lien on the SHF, which receives a diverse stream of broad-based revenues. Revenues credited to the fund are subject to legislative alteration, although certain monies are constitutionally dedicated to transportation.

STRONG DEBT SERVICE COVERAGE: The state covenants to ensure that revenues to the SHF equal no less than 3x annual debt service. Actual annual and maximum annual debt service (MADS) coverage has been well in excess of this requirement.

FUTURE BORROWING IS LIMITED: Issuance of additional highway revenue bonds requires 3x coverage of MADS. The requirement that MADS not exceed 18% of current or future SHF revenues was suspended by the state for fiscal years 2016 and 2017 but KDOT expects to only modestly exceed this threshold. Fitch expects this requirement to be reimposed beginning in fiscal 2018.

RATING SENSITIVITIES
The rating is sensitive to the performance of pledged revenues and debt service coverage.

CREDIT PROFILE
The 'AA+' rating reflects the diverse stream of broad-based revenues in the SHF, along with the protections afforded by the strong 3x MADS additional bonds test. The legislature has altered, and may well continue to alter, the components and/or distribution formulas of the revenues credited to the fund. However, bondholders are insulated from the changes to the extent that the state has covenanted to maintain revenues in the highway fund at least equal to 3x coverage of annual debt service. In addition, certain revenues are constitutionally dedicated to transportation.

The bonds are secured by and payable from a gross pledge of all revenues in the SHF, including motor fuel taxes, a portion of the state's general sales and use tax, and federal aid. A subset of pledged SHF revenues are constitutionally dedicated for transportation and include 66.37% of state motor fuel tax receipts and a percentage of vehicle registration and license fees. Combined, these constitutionally dedicated revenues alone totaled roughly \\$505 million in fiscal 2015 (unaudited, cash basis), providing healthy 2.6x coverage of debt service.

Sales and use taxes have grown to represent approximately 35% of SHF revenues; \\$511.7 million in fiscal 2015, up from 26% in fiscal 2013, as the SHF's allocation statutorily increased effective July 1, 2013. Effective July 1, 2015, the state increased the sales tax rate to 6.5% from 6.15% as part of its fiscal 2016 gap-closing measures but the SHF's share of the revenue will match that expected from the July 1, 2013 revision. To accomplish that target, the SHF's share of sales tax receipts was changed to 16.226% of receipts in fiscal 2016 and to 16.154% in fiscal 2017. The higher share in fiscal 2016 incorporates a one-month lag in revenue collections.

Federal aid accounted for a sizable 28% of SHF revenue in fiscal 2015. KDOT has conservatively forecast reduced support from federal aid in future fiscal years given uncertainty over a long-term federal transportation authorization bill and continues to target annual debt service coverage of 4x from state-source revenues alone.

SHF revenues for fiscal 2015, less federal funds, increased 2.5% from fiscal 2014, covering debt service by a solid 5.3x; including federal funds, total revenues decreased by 3.1% as federal revenue fell by 15% from the prior year due to a decline in federal project reimbursements. Coverage in fiscal 2015 from cash-basis information, including federal funds and the current issue, is currently estimated at 7.5x. Beginning in fiscal 2014, federal reimbursements are permitted to be included in the calculation of the 3x covenanted requirement for additional issuance; local reimbursements are not included in the calculation.

MADS coverage by fiscal 2015 revenues (excluding both federal and local funds) is 5.6x; when including a \\$300 million debt issue expected in fiscal 2016 under the capital program described below, MADS by fiscal 2015 revenues remains a solid 5.2x. Constitutionally-dedicated revenue sources by fiscal 2015 revenues cover MADS, including this issue, by almost 2.8x; MADS coverage declines to a still comfortable 2.6x when including the expected issuance.

KDOT's mission is to plan, develop, and operate various modes of transportation across the state. KDOT's current transportation improvement program, Transportation Works for Kansas (T-WORKS), runs through fiscal 2020 and is expected to fund \\$7.6 billion in projects over the life of the program. Debt issuance is dependent upon the availability of SHF revenues rather than a statutory dollar limitation, and about \\$1.075 billion in total bonding is expected to be issued over the course of the program; \\$300 million remains to be issued, not including the current issue.

Amendments made by the 2010 legislature included permitting issuance of highway revenue bonds so long as MADS on all outstanding and proposed bonds does not exceed 18% of SHF revenues for the current or any future fiscal year; this 18% cap did not alter the 3.0x additional bonds test. The cap has been suspended for fiscal years 2016 and 2017 to accommodate two factors: an early draw of federal funds in fiscal 2015 that reduces SHF revenues in fiscal 2016 and expected debt service expense in fiscal 2017 from the expected bond issuance in fiscal 2016.

Outstanding bonded debt totals \\$1.67 billion, 19% of which is outstanding in a variable-rate mode, which is down considerably from 27% in 2014 due to refunding activity. KDOT has floating to fixed rate swaps in place for these bonds.